The demand for labour, marginal productivity theory Flashcards
hi
What type of demand is labour?
Derived demand
What is meant by labour being derived demand?
It means that the demand for labour comes from the demand for what is being produced
What will firms base their demand decisions for labour on?
Marginal Revenue Product (MRP)
Define MRP
The extra revenue generated when an additional worker is hired
How do you calculate MRP?
MRP = MPP (Marginal (Physical) Product) X MR (Marginal Revenue)
What is the marginal product of labour?
The additional output each unit of labour can produce
What is the marginal revenue of labour?
The additional revenue derived per extra unit of labour
How does the MRP relate to the demand curve?
The demand curve shows the MRP (MRP=D)
For an individual firm, why is the (labour) demand curve the MRP curve?
At any given wage rate, the MRP curve tells us the quantity of workers a given firm should employ, hence it is the demand curve
Why does the Labour Demand Curve slope downwards in the SR?
- In the short run the labour demand curve is downward sloping due to the law of marginal dimisnishing returns.
- This is significant because it means the marginal revenue product (MRP) curve follows the same pattern as the marginal product curve.
Define the law of marginal diminishing returns
The law of diminishing returns states that in the short run (where there is at least one fixed factor of production), as variable factors of production are added to a stock of fixed factors of production, total/marginal output will initially rise and then fall.
Up until what point will a profit maximising firm employ workers?
Up until the MRP of the last worker hired is equal to the wage rate.
Therefore what does a workers MRP determine?
Whether they will be employed or not at a given wage rate by a firm
i.e. the MRP curve is the demand curve for labour in the short run.
What is the marginal productivity theory of the demand for labour?
It suggests that firms will only demand workers if the MRP of the workers is at least equal to the wage rate
–> i.e. workers are paid according to MRP and the number of workers firms will employ is determined by MRP
Therefore measuring and mapping MRP provides info regarding employment at different wage rates
Give 4 evaluative/criticism points of the MRP theory
1) Difficult to measure productivity and MRP in jobs such as nursing and teaching as nothing physical is being produced. Therefore, the idea that employment is decided based on MRP may not hold
2) Many jobs in the real world are not individual; they are teamwork based. This makes it very difficult to measure the MRP of each individual worker and therefore for firms to use MRP to make efficient employment decisions
3) The existence of trade unions can create imperfections in the labour market, ignoring the profit maximising condition, which determines employment for firms, instead forcing up wages using collective bargaining and demanding more employment using strike action as a threat. This way, trade unions work against the idea of a downward sloping demand curve where employment is based on MRP at a given wage rate.
4) MRP theory suggests that rational profit maximising employers will only pay workers a wage equal to worker MRP, never more and sometimes less. This theory does not hold for the self-employed who may pay themselves much more than their MRP as their objectives are clearly different to a larger scale profit maximising corporation.
Define labour demand
The number of workers employers are willing and able to employ at a given wage rate in a given time period
What (non-wage) factors can affect/shift the demand for labour? (Think PDPC)
1) Productivity directly affects an individual’s MRP by influencing marginal product. If labour productivity increases, the MRP of workers rise. This increases the willingness and ability of firms to hire workers at a given wage rate, shifting the labour demand curve to the right from D1 to D2.
2) Demand for the final product. Labour is a derived demand. If the demand for the final product produced increases, so will demand for labour, increasing the willingness and ability of firms to hire workers at a given wage rate, shifting the labour demand curve to the right from D1 to D2.
3) The price of the final product directly affects MRP by influencing marginal revenue. If the final price of a product increases, the MRP of workers rise. This increases the willingness and ability of firms to hire workers at a given wage rate, shifting the labour demand curve to the right from D1 to D2
4) The cost of capital is an important determinant of labour demand in the long run. If capital becomes more expensive, workers can substitute for capital; a more profitable decision by firms, increasing the willingness and ability of firms to hire workers at a given wage rate, shifting the labour demand curve to the right from D1 to D2.
Define the elasticity of demand for labour
Measures the responsiveness of labour demanded given a change in the wage rate
What are the factors that can determine the elasticity of the labour demand curve? (Think SECT)
1) Substitutability between labour and capital. As wages rise, labour demand will be responsive and fall proportionate more than the wage increase if labour arid capital machinery is easily substitutable; wage elastic demand.
2) Price Elasticity of demand (PED) for the final product. If the PED for the final product is price inelastic, an increase in wages for workers in the industry can be passed onto the consumer via a higher price as demand will not fall considerably with revenue and profit increasing. Therefore, labour demand will decrease but proportionately less than the wage increase; wage inelastic demand in this case.
3) Labour costs as a proportion of total costs. If labour costs are a large percentage of total costs, as wages rise, firms need to reduce employment to stay profitable where the fall in labour demand will be proportionately more than increase in wage; wage elastic demand.
4) Time period. In the short run normally two factors of production are fixed: land and capital. Therefore, workers cannot be easily substituted for capital as wages rise, making labour demand wage inelastic. However, in the long run, as wages rise, the demand for labour will fall proportionately more than the increase in wage as all factors of production are variable. This means that capital can substitute for labour, thus labour demand is wage elastic.
